Back in October, the CEO and co-founder of Twilio Inc (NYSE:TWLO), Jeff Lawson, was on the front cover of Forbes and the headline boasted: “The World’s Sexiest Stock.” A few months before, the company had pulled off a red-hot public offering, with the shares nearly doubling.
But unfortunately, the Forbes story would essentially mark the peak of Twilio stock, which would plunge from $65 to $24.
Ironic, huh? Definitely. But there was more. Consider that the Forbes article also indicated that Twilio stock could be vulnerable because of customer concentration. But the author noted that “most of the growth still [comes] from smaller accounts” and “Wall Street appears unconcerned.”
Worries for Twilio
Well, as seen with the latest earnings report, the biggest problem with TWLO stock is actually customer concentration! The company had to lower its guidance because of the deceleration of revenues from Uber. From Q4 to Q1, the customer’s spending went from 17% of total revenues to 12%.
And it appears that the trend will continue. Uber has been developing some of its own cloud-based communications systems and is starting to use solutions from alternative vendors.
On the news, analysts from Pacific Crest downgraded Twilio stock from “overweight” to “sector perform.” They think that growth may not perk up until the second quarter of next year.
Yet this may prove too optimistic for Twilio stock. The reason is that Uber may not be a one-off. Instead, the situation could represent serious problems with the core business of TWLO.
After all, why is Uber looking elsewhere? Could it be that there are more cost-effective alternatives? If so, this should be scary for investors in TWLO stock. In other words, the company’s technology may be undergoing commoditization.
It’s also important to note that Uber is not the only company that represents a sizeable portion of Twilio’s revenues. Note that Facebook Inc’s (NASDAQ:FB) WhatsApp came to about 9% in 2016.
As for the competitive environment, there are various tough rivals that TWLO must contend with. They include Cisco Systems, Inc. (NASDAQ:CSCO), Vonage Holdings Corp.’s (NYSE:VG) Nexmo, CallFire and Bandwidth.com.
But the biggest risk for Twilio stock could be Amazon.com, Inc. (NASDAQ:AMZN). Over the years, the company has built its own communications platform for its ecommerce business. And yes, AMZN has recently fashioned this into a product, with a focus on the massive opportunity for call centers. The company could actually get quite a bit of traction because of the large customer base for its AWS cloud offering. Of course, Amazon has a penchant for engaging in aggressive pricing — and the company can do this as it has a diverse set of offerings.
In light of all this, Global Equities Research analyst Trip Chowdhry has remarked: “Pretty much TWLO is toast.”
Bottom Line on Twilio Stock
It is encouraging that Lawson recently purchased 100,000 shares at an average price of $23.43 and a TWLO director bought 10,000 shares. But it would be much better if there was much wider participation among senior managers. Let’s face it, Lawson already owns 7.8 million shares! Also back in October he sold 830,977 shares, for a total of $32.1 million.
Something else: Even with the steep drop in Twilio stock, the valuation is not necessarily cheap. Consider that the price-to-sales ratio is at 7.2X. No doubt, this does seem a bit of a stretch since the top-line is expected to decelerate substantially this year — going from 66% last year to 28.5% to 30.6% in 2017.
More importantly, the problems with TWLO look more than temporary. The company’s business appears to be under quite a lot of pressure, which could easily result in further deterioration of the stock price.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
